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GAAP Assumptions
Business Entity Concept: A businesses transactions are separate from its owners
Continuing Concern Concept: Assumes that a business will continue in the future if if preforming poorly
Time Period Assumption: A businesses life is divided into time periods
Monetary Unit Assumption: Data is kept using a monetary unit
GAAP Principals
Cost Principle: The value of an item stays the same amount as it was purchased for even if it decreases
Objectivity Principle: Two different people should be able to calculate the same amount. (no personal feelings involved)
Conservatism Principle: Do not anticipate future loss or growth
Materiality Principle: Must include all information related to the business even if negative
Consistency Principle: Businesses have to keep things consistent within their records.
Reevaluation Principle: Allows accountants to change the value of assets based on changes in market prices
Revenue Recognition Principle: Revenue must be recorded the time the transaction was made
Accounting Cycle
Analyze Transactions
Journalize Transactions
Post to Ledger accounts
Prepare an unadjusted trial balance
Adjusting entires
Create a worksheet
Create an adjusted trial balance
Closing entires
Post closing trial balance
Accounting Equations
A = L + OE
L = A - OE
OE = A - L
Source Documents
These are documents that confirm a businesses transactions (Cheques, Bills, Receipts, etc). Relates back to objectivity principle
Debit/Credit Theroy
Debits on the left, Credit on the right
Cash Sales Slip
A source document that proves a transaction paid with cash
Sales Invoice
Shows that a sale was made on account
Purchase Invoice
Shows a purchase made on account
Cheque Copies
Shows a transaction made with a cheque/cash
HST (Harmonized Sale Tax)
HST - 13% (5% GST & 8% PST
How to find an error (4 tests)
If the trial balance is a multiple of 10, an addition error has likely been made therefore re-add the trial balance columns
Check that the values in the journal and the trial balance are equal
Divide the trial balance difference by 2 and search the ledger or journal for that value and make sure it was debited or credited correctly
If the trial balance difference is a difference of 9, a transposition error (order of digets) or a misplaced decimal point.
Depreciation
A reduction in value of an asset
Aka: Amortization (Reduction of value to zero)
Applies to long term assets
Straight Line Depreciation
This method assumes depreciation is the same every year.
Formula: (Cost of assets - Salvage Value)/Useful life of asset
Adjusting entry: straight line depreciation
Depreciation Expense (Income Statement): Represents depreciation just this year
Accumulated Depreciation (Balance Sheet): Represents depreciation from all previous years
Declining Balance Depreciation
This method assumes the asset is used more in its early life then later on
Formula: Original capital cost - (Capital Cost x CCA Rate)
Adjusting entries: Declining Balance Depreciation
Depreciation Expense (Income statement): Represents depreciation just this year
Accumulated Depreciation (Balance Sheet): Represents depreciation throughout an assets life
Half Life Methodm (Declining Balance Depreciation)
Divide the first year capital cost of an asset by 2 and calculate declining balance depreciation from there
Real Accounts (closing entries)
Accounts that will never be closed:
Assets
Liabilities
Capital
Nominal Accounts (closing entires)
Accounts that will be closed next year:
Revenue
Expenses
Drawings
Closing Entires
Depreciation Expense (optional)
Supplies Expense (optional)
Revenue
Expenses
Net Income
Drawings
Merchandise Businesses
A businesses that buys merchandise and sells them
2 Types:
Wholesaler: Buys. merchandise from manufacturer, sell to retailer (Costco)
Retailer: Buys merchandise from wholesaler and sells to public (Footlocker)
Inventory Formula
Beginning Inventory + Cost of goods purchased - Cost of goods sold = Cost of ending inventory
Cost of goods sold formula
Beginning Inventory + Cost of goods purchased (add Freight In) (subtract returns) - Ending Inventory
Beginning Inventory + Cost of Goods Purchased = Inventory available to sell
Gross Profit Margin
Sales - Cost of goods sold
Periodic Inventory System
An accounting method where businesses do not update merchandise inventory account until the last day of the fiscal cycle
Flaw: Time consuming since physical count is required and does not provide a current count of inventory
Freight In
An expense for shipping of products
Sales terms
Net 30 - Full amount is due in 30 days
Net 60 - Full amount is due in 60 days
2/10, n/30 - 2% discount if paid in 10 days or full price in 30
1/15, n/60 - 1% discount if paid in 15 days or full price in 60
Perpetual inventory system
An accounting method where businesses keep an up to date log of transaction/inventory.
Purchase account turns into Merchandise Inventory
Financial Position
A summary of items owned owed, and net worth. (Assets, liabilities, capital)
Unwritten Accounting Rule
At least 2 accounts are impacted during a businesses transaction
Equation Analysis Sheet
Shows a companies financial position in chart form